IAG flags rise in insurance premiums

Premiums for home and car insurance are set to rise by 5 to 10 per cent over the next 12 to 18 months due to inflation in the cost of meeting claims, one of the country’s biggest insurance companies says.

The chief executive of Insurance Australia Group, Mike Wilkins, today said the costs of meeting insurance claims were continuing to rise faster than inflation.

Although the costs from recent flooding and bushfires are within insurance companies’ allowances, Mr Wilkins today ‘‘underlying longer-term cost trends’’ were likely to result in higher prices for customers.

‘‘On a blended basis we could see prices moving in the 5 to 10 per cent range,’’ Mr Wilkins told BusinessDay.

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Mr Wilkins said the likely increase was not due to any individual event, but was being caused by ongoing rises in costs such as salaries.

IAG, the group behind the NRMA, RACV and CGU brands, is Australia’s biggest insurer of cars and homes.

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The comments came after it handed down a big jump in profits, with earnings tripling to $461 million in the six months to December amid lower claims from natural disasters and buoyant financial market conditions.

In early afternoon trade IAG shares were up 3 per cent, or 16 cents, at $5.58.

Like all insurers, IAG has been hit by an increase in claims from natural disasters in recent months.

Earlier this month it said the recent bushfires and damage caused by ex-Tropical Cyclone Oswald would cost the group up to $175 million.

While these costs are within the company’s allowances, Mr Wilkins said such incidents inevitably pushed up repair costs.

‘‘The flooding coming from Oswald and the bushfires in Tasmania and Victoria and NSW.... do see our claims spike,’’ he said.

‘‘On a regionalised basis, where those events are, the laws of supply and demand coming with people like builders and people who carry out smash repairs.’’

During the six months to December, IAG posted strong growth in earnings from its core Australian and New Zealand operations. Group profit margins widened substantially to 19.9 per cent.

The group also said it was carrying more capital than was needed under its own benchmarks - analysts estimate it is holding between $240 million and $740 million in surplus capital.

In a bid to tap into an expected jump in demand for financial services from Asia, IAG aims to get 10 per cent of its gross revenue from premiums from Asia by 2016, and has established profitable businesses in Malaysia and Thailand.

It is also eyeing potential acquisitions in Indonesia, though Mr Wilkins said the company was in no hurry to announce a deal.